It’s time to sharpen your pencils and work on that 2018 income tax return. Just make sure you understand the new tax law first.
Half of people polled by the personal finance website said they don’t understand how the tax overhaul affects their bracket.
Meanwhile, 3 out of 10 are unsure what exactly changed after the legislation was signed into law at the end of 2017.
NerdWallet took an online survey of 2,005 U.S. adults in December 2018.
“You expect people to be a little confused,” said Andrea Coombes, a tax specialist at NerdWallet. “It’s worrisome that people aren’t up to speed on what’s changed under the new law.”
Here are the highlights of the new tax law and what you can expect as you prepare your 2018 tax return.
In all, 3 out of 4 of survey participants correctly identified the passage of the tax overhaul as taking place in 2017, NerdWallet found.
One of the major changes that took place as a result was an increase in the standard deduction: $12,000 for single filers and $24,000 for married filing jointly in 2018.
Personal and dependent exemptions, which you were able to claim for yourself, your spouse and each of your dependents, are now out of the picture.
The law also placed limitations on itemized deductions, including a $10,000 cap on the state and local tax deduction.
Another thing that will grab your attention is that individual income tax rates overall have fallen.
The top rate is now 37 percent, compared with the highest rate of 39.6 percent before passage of the new law.
With the new reality of lower tax rates and higher standard deductions, workers were supposed to make sure they adjusted the amount of income taxes withheld from their pay.
Enter Form W-4 and the updated tax withholding tables — documents you use with your employer to tailor the amount of tax that comes out of your paycheck.
The Treasury Department touted bigger paychecks for workers as a result of the tax overhaul.
About a third of the NerdWallet survey participants said that they noticed an increase in pay.
However, the IRS has been encouraging filers to review their withholding in light of the new law. That’s because workers who withhold too little in taxes may end up with a bigger paycheck for now — but they will owe come tax time.
Withhold too much, and you’re giving the government an interest-free loan.
Even retirees were encouraged to review their withholding.
The IRS granted a reprieve for taxpayers this month, waiving the penalty for filers who paid at least 85 percent of their total tax liability for 2018.
If you haven’t reviewed your paycheck in 2019, get to it now.
Families with children will notice that the new tax law has boosted the child tax credit to $2,000 for each kid under age 17, which is double the amount under the old law.
The dependent and child care credit is also still around: You may claim a maximum of $1,050 for one child under age 13 ($2,100 for two or more kids).
A slate of itemized deductions may be out of reach for many, however. For instance, you can only claim up to $10,000 for the state and local tax deduction.
Here’s another break that’s out: miscellaneous itemized deductions — which allowed you to deduct unreimbursed employee costs, tax preparation fees, investment expenses and more, as long as they exceeded 2 percent of your adjusted gross income.
Find a list of itemized deductions that you may miss on your 2018 tax return here.
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